Treasury dynamics

Within the context of treasury bond dynamics, it’s interesting to understand the health and motivations of structural buyers. China and Japan are silently decreasing its holdings, institutional investors (pensions, endowments) are busy offloading Private funds, which leaves us with Banks. In normal circumstances, banks are natural buyers of treasuries, to fill the gaps in their lending books. But currently, banks are not in a good spot to add more treasuries unless things change in the way they are accounted for (motivation). Unrealized losses in the banks treasury portfolio accounts for 15% of capital, and that’s exclusively due to duration. If we end up having a recession, or simply a slowdown and credit losses go up (corporate bonds, credit cards, CRE loans, mortgages, etc) banks will be in a tougher spot to continue adding bonds. You could argue that in that environment long bonds will rise in price, fixing the duration problem, as they’re typically act as safe haven. But that has not been the dynamic lately. It’s not clear to what extent treasuries will counterbalance the effect of a crisis when government debt is pushing $37Tn and the deficit is 7% of GDP. Which leaves us with the Fed as the buyer of last resort. It will not be a stealth QE, it will be full fledged.

Want to know more? You can find all our posts at https://www.myfundamental.net/insights

#iamfundamental #soyfundamental #wealthmanagement #familyoffice #financialadvisor #financialplanning

#policymistake #ratecut #stagflation